European markets fell on the news Tuesday that coalition government talks in Greece have failed after nine days of discussions, meaning the country is heading for another election next month.
The worry is that the next round may lead to the triumph of parties that want to scrap the country's bailout agreements with international creditors, which would put Greece's membership of the euro into jeopardy.
The left-wing Syriza party, which came second in the vote on May 6, has said the draconian terms of Greece's financial rescue agreements must be scrapped or rewritten. The party has been gaining in the polls over the past week, raising the specter of a showdown between whatever new government is eventually formed in Athens and the country's rescue creditors.
"With Syriza now leading the opinion polls, the chances that the next government will be dominated by the anti-bailout parties _ and that Greece will leave the eurozone sooner rather than later _ are growing," said John Higgins at Capital Economics.
Having enjoyed some support early in the day, stocks in Europe ended the day in negative territory, particularly in Athens, where the main exchange lost another 3.6 percent.
Among Europe's main markets, Britain's FTSE 100 ended 0.5 percent lower at 5,437.62 while Germany's DAX fell 0.8 percent to 6,401.06. The CAC-40 in France shed 0.6 percent at 3,039.27. The euro also fell, trading 0.4 percent lower at $1.2771.
Wall Street managed to hold on to early gains, helped by a strong manufacturing survey for the New York region and upbeat retail sales figures for April _ the Dow Jones industrial average rose 0.5 percent at 12,754.12 and the broader S&P 500 index gained 0.5 percent to 1,344.53.
Earlier, stocks in Europe had been buoyed by the surprise news that eurozone economy did not fall into recession in the first quarter of the year. Output was flat compared with the previous three-month period, better than the 0.2 percent drop that analysts had been expecting. A drop would have put the eurozone technically back into recession, which is defined as two consecutive quarters of economic contraction.
"In the current context, zero growth in the eurozone in the first quarter is relatively good news," said Marie Diron, senior economic adviser at Ernst & Young. "It suggests that the economy is not falling off a cliff under the burden of fiscal austerity."
Asian markets fell earlier on Tuesday, with Japan's Nikkei 225 down 0.8 percent to 8,900.74, its lowest close since Feb. 3. South Korea's Kospi lost 0.8 percent to 1,898.96. Australia's S&P/ASX 200 lost 0.7 percent to 4,266.30.
Mainland Chinese shares extended their losses, with the Shanghai Composite Index hitting another three-month low, losing 0.2 percent to 2,374.90. But Hong Kong's Hang Seng, which some analysts said was oversold after more than a week of losses, rebounded 0.8 percent to 19,894.31.
Benchmark oil for June delivery was down 21 cents to $94.57 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.35 to settle at $94.78 in New York on Friday.
Pamela Sampson in Bangkok contributed to this report.